Buying and Selling: May 2008 Archives


Many agents seem to answer this question differently depending upon whether their client is the prospective buyer or seller. When their client is making an offer, "No, your deposit could never possibly be at risk," while when their client is evaluating an offer, "And besides, if they renege or can't bring it off, you get to keep the deposit." Both of these are false, misleading, and practicing law without a license.

The cold hard fact is that the deposit is always at risk, but there is absolutely no guarantee that a jilted seller will get it, either. The answer to "Is the deposit at risk?" from a real estate agent can never honestly be anything other than "Yes."

For buyers, the deposit is "at risk." Otherwise, what would be the point of having it? If it couldn't be lost, why would it need to go into escrow? Just to prove the buyer has a couple thousand dollars to their name? I can do that with a Verification of Deposit. The only reason to make a deposit on a purchase offer is that it is at risk, and no listing agent in their right mind is going to accept any purchase offer where there is no deposit - even if the buyer is doing a "one dollar down" VA loan. That seller is risking a minimum of a full month of all carrying costs (usually much more) upon your representation that you want the property, and they are entitled to keep your deposit if certain conditions are met. For sellers, no you don't automatically get the deposit if the buyer flakes out. There are burdens upon you and your agent, and contingencies, or escape clauses for the buyer, built right into the purchase contract. You don't want to allow those clauses, that's your choice, but you'll severely restrict the number of people willing to make offers as well as the price you will actually get. Even if the seller negotiates the payment of the deposit to them as part of the contract, the buyers can still sue to get it back. This is the real world and an offer is being made with real money and real consequences to that money. If you're unable to come to terms with that fact, stay a renter, because that fact is not going to change. For agents, if the only way you can make a sale is to misrepresent the deposit, it doesn't take a great fortune teller to see a courtroom in your future.

For buyer clients, I can do a lot to keep a deposit from being forfeit - any agent and loan officer can. Get out in front of all the contingency issues and any other reason that my client might decide they don't want to purchase the property, and get them dealt with right away, during the contingency period. Loan, appraisal, inspection, I want them all done before their contingency expires, or at the absolute minimum, a loan commitment with contingencies I'm certain we can meet. As of this writing, I have not yet lost any buyer deposit money. Nonetheless, since no agent can honestly guarantee the deposit will not be lost, I cannot and will not pretend that I'm some kind of exception to the law. The only way I could make such a guarantee is by putting up my own money as a surety, and if my client lost a deposit for a reason that was in any way my fault, I hope I would reimburse them (Until it happens and I'm facing an actual choice, there's no way to be certain). But it's not my investment, and if the investment succeeds, I'm not going to share in the proceeds (I'm given to understand that's illegal, at least in California), and one of the essential, unchangeable facts about investment is that there is no such thing as a risk free investment. If you don't understand this, any money or assets you may have can be considered a temporary thing, and you have no business in a profession with responsibility for other people's money. Anyone willing to say that there is no risk is either a fool or a crook. Nor is it likely your agent or anyone will reimburse you, especially for situations beyond their control, or if you misrepresent your situation or miss deadlines.

For listing clients, the same thing applies: Get what I need to done right away, and keep after that buyer's agent to remove contingencies in a timely fashion. If they won't remove contingencies when they are supposed to be removed, it tells me all I need to know. It's my client's call, but I know what my recommendation is going to be. I want the transaction to work, but I also want my client to get that money if it doesn't. Incidentally, Deposit issues are one reason of many that nobody should ever be willing to accept dual agency.

The bottom line is like something out of quantum physics: Schrodinger's Cat. Ideally, you want the sale to go through and record and for everybody to be happy because it all turned out exactly as agreed. Unfortunately, that's not perfectly predictable or knowable in advance. If it was, no real estate transaction would ever blow up, and the deposit would not be an issue. There are laws and procedures, and things agreed to in the purchase contract, that you have to be a real estate lawyer to offer an informed opinion about, and the judge, arbitrator, or whatever making the decision to make a definitive ruling. Escrow has custody of the money, but they're not going to do anything without mutual agreement of the buyer and seller. Either side can potentially decide to be stubborn and force the matter to arbitration, court, or whatever is appropriate, and all the consequent expenses of the legal system (which additional money is also at risk as the usual agreement is that prevailing party is entitled to legal expenses). And the legal system runs in incomprehensible ways for unpredictable reasons - the one thing that seems to be a constant is that if the judge wants the ruling to go a certain way, they can probably find a precedent to justify it if they try.

The point is this: The deposit is at risk. It is not "safe", and it does not necessarily belong to the seller either. Since this is cash, people understand that it is real money, because they had to scrimp, save, and set every single dollar in it aside from other uses, so they get understandably nervous about it. It represents a great vacation, a down payment on a new car, or something else very desirable that they're giving up, and they're putting at risk of forfeiture. Against this, the seller wants it if the transaction fails. There are ways to protect it, and ways to endanger it, and you've got both agents working to their client's advantage. As with any other competitive or potentially competitive situation, that makes the result indefinite until the game is complete. It isn't common in my experience that the deposit is forfeit, but it does happen. And anybody who tells you otherwise is either lying or hopelessly incompetent. Nonetheless, real estate is such a powerful investment that you are well advised to come to terms with the risk, because it's a necessary risk in order to buy real estate.

Caveat Emptor

Article UPDATED here


No, I'm not a David Letterman watcher, for reasons having to do with turning into a pumpkin before his show starts. I'm going to treat it a little more seriously than he does, as this is a serious subject, but I'll do my best to inject a little humor into it.

10. Surrounding Environment - These are environmental factors arising from areas beyond your property, and therefore, beyond your immediate control. Freeway noise 24/7, being downwind of a hog or chicken farm, being next door to a strip club with a huge neon sign constantly flashing, "LIVE NUDE GIRLS" - all of these and many more neighborhood factors can prevent people from even looking at your property. They see what's around it, and decide they're not interested in living there, or that the investment potential for the property is limited (to be charitable). The only real way to fix problems of this nature is not to buy the property in the first place. Look at all of the issues. Just because it doesn't bother you now doesn't mean it won't bother prospective purchasers later. Blame your buyer's agent. If you didn't have a buyer's agent, that leaves only one candidate for blame. You'll find them hanging around any mirror you might check.

9 HOA: This is closely related to surrounding environment, and condos and PUDs are the poster children of what a lot of people don't want. People want the property to be theirs to do with as they please. It's a sad fact of life that in an increasing number of places, they are going to be disappointed because they can't afford anything without a homeowner's association. Homeowner's Asssociations really are a good guardian of property values, but they have a tendency to give way to much power to the busybody and the would-be dictator. Unfortunately for a lot of people, the newer developments they crave all have homeowner's associations because while everyone knows that they personally can be trusted to maintain the property, those horrible neighbors who can't be trusted won't trust them. Unfortunately, the only way to appeal to people who don't want an HOA is not to have an HOA. Once again, blame the buyer's agent that "helped" with your purchase.

8. Zoning: Zoning restrictions, lot constraints, etcetera are all parts of this category. If you've got a two bedroom property and setback requirements keep you from building a third bedroom, your property is not likely to appeal to people who need a three bedroom place to live in. Once again, the only way to fix this issue is not to buy where it is an issue. Over-restrictive zoning is a real economic problem for a lot of reasons, but while people like to be able to cause everyone else in the neighborhood problems by not having enough parking for their apartment house or mini-dorm, they don't want everybody else turning the tables and causing them problems. Yeah, maybe you can get the zoning changed sometimes - but that's not the way to bet.

7. Schools: If you buy in an area that includes the right to attend a great public school, that's a gift you give yourself that keeps on giving, at least until the neighborhood starts voting against additional property tax bonds. Or if you can cause a school that heretofore taught only "hanging out with a GPS tracker on your ankle," to start teaching the kids some economically desirable skills, you can expect a windfall in the form of property value. I think that shackling kids to a particular neighborhood public school is slow motion suicide for society, but evidently at least fifty percent plus one of teacher's unions feel it's beneficial to getting union leaders more money and power. Once again, this is just a fact of life, and once you have bought a particular property, you're locked into whatever the local educational insanity might be.

6. Clutter: If you're tripping over knick-knacks, carnivorous house plants, and cannot eat meals as a family because the table is six feet deep in stuff, it would be a real good idea to do something about it. There are a lot of easy options here: Trash, charity, storage rental, loan or give it to some family member who's not trying to sell their house. If you're trying to sell, engrave the saying, "A place for everything and everything in its place" upon your soul for the duration. If there's any doubt as to whether you need it in your day to day life, the place for it is "elsewhere." If the place is so full of your stuff, people worry about whether there's going to be room for their stuff. Believe me when I tell you I understand how difficult this is: I've got two young kids and two dogs, all four of which are highly efficient entropy generators, but getting clutter under control and keeping it there is critical to selling for a good price.

5. Staging: Absolutely empty is better than "chock full of clutter," but then people wonder how their stuff would fit. I still have trouble believing this one, but facts are facts. Most people have a hard time picturing their couch and their TV in the living room. A small amount of furniture gives them a reference point, scale, and a starting point for their mental decoration. It helps them figure out how their stuff is going to fit. A bare minimum of vanilla furniture shows better than even a vacant, empty property. Even most stagers seem to want to put too much stuff in the place, for some reason. Seriously, keep it to a bare minimum. A bed in the bedroom, a couch in the living room, a dining set in the dining room. Maybe one nightstand in the master bedroom, a coffee table and placeholder for the TV in the living room. That's it. If the place is not vacant, and you are still living there, that's still the target you should aim at. If you don't absolutely have to have it every day, get it out of there. This especially applies to family heirlooms, anything expensive, and anything irreplaceable. Get. It. Out. People want to be able to see their stuff in the place, and they can't do that if there's too much of yours. By the way, this applies to you, too, at least while prospective buyers are looking at it. Don't follow them around your property like you're worried they're going to steal the silverware. Get out. If there's anything you're worried about them stealing, get it out also, and keep it out until the property is sold. For everything else, your listing agent should have a record of who has been in the property, and you should be insured even if you're not trying to sell the property.

4. Condition Is it clean? Is it neat? Is it attractive? Here's an example for you: Carpet is maybe $40 per square yard, installed, with a good pad. If you've got a hundred square yards of carpet that needs to be replaced, call it $4000. Not replacing it will probably cost you at least $10,000 on the sales price. More likely double that, and it'll take longer to sell and you'll end up giving a carpet allowance to your buyers out of what you do get. Dirty floors, chipped tiles, all that stuff is unbelievably costly not to fix. Believe me, I understand what a pain it is. My newest family member loves to chew drywall. It costs far less to fix it yourself than you're going to have to give up to sell the property. Get a cleaning service in if you don't want to scrub everything yourself. It's stupid, but opening the blinds or drapes so that prospective buyers see all that light as they're walking in is worth serious cash, not to mention much broader interest. The point is this: Many prospective buyers have the imagination of a rock, and their agent isn't any better, because they don't want to say anything that would give the people they're supposed to be helping (but aren't) grounds to sue. You can choose to market only to the people who are visualization's answer to Albert Einstein, but it really does narrow your potential market, and hence, cost you money and time (and therefore more money) when you're trying to sell.

3. Showing Restrictions: If people can't see your property when they have the time, they're not going to make an offer on it. Cold hard fact. Since the time of highest interest is the first few days its on the market, if you haven't gotten an offer withing thirty days, not only is something wrong but it's cost you some serious cash in the form of lowered selling price. Showing instructions are easy to fix. "Just go!" is absolutely the best, but (unless you're an international supermodel), prospective buyers don't want to catch you in the shower or in bed any more than you want to be caught there. One bad experience in this area is all any agent needs, and I've had mine (believe me, you don't want details). Asking for a few minutes notice so you can evacuate is reasonable. Telling prospective buyers to avoid a time slot is also reasonable. But the more restrictions you put on showing, the more likely it will be that you've raised the cost for viewing your property too high. Asking for four hour notice - let alone 24 - is almost guaranteed to prevent prospective buyers from viewing your property. And if someone does ask that far in advance, for crying out loud get back with them and be as accommodating as you possibly can. I actually laid out a trip "day before" last week, and of the seven people who wanted advance notice, precisely one got back to me. That gives me quite a bit of information as to how interested they really were in selling the property, which is to say, not very.

2. Price: I really hope you weren't expecting this to be number one. Buyers choose properties to look at based upon asking price. They choose which property to make an offer on based upon how well your property compares to others of similar asking price. If your property is clearly outclassed by properties of equivalent asking price, you're doomed. It is to be noted that just about every sin in the list is forgivable if the price is low enough, but the more sins there are, and the worse the violation, the lower the sales price is going to be, and most of the rational world wants the highest possible net from the sale. Trying to make believe that any problems that exist aren't there will only prevent the property from selling at all.

1. The Agent Plain and simple, you've chosen a bad one. Either they don't market the property effectively, they don't explain how things work to you, they make it difficult for other agents to show the property, they discourage offers represented by other agents, they don't return phone calls, they evidence a bad attitude, they're using your property to troll for buyer clients and don't want it to actually sell - the list goes ever on and on. They're effectively raising the price to make an offer on your property. Just because you've signed a listing agreement doesn't mean you're on cruise control. You need to monitor agent performance. At least, if you want to know whether they are performing or not. Are they forwarding all offers? Are they discouraging people from making offers because that offer might mean they don't get a kickback? All of these sins and many others really do happen.


Bonus Super Deluxe Reason. Homeowner Attitude About sixty percent of all listings I read leave me with one very strongly negative conclusion: That the owner of this property does not really want to sell. Maybe it's the agent's fault in some cases, but if you won't find - or pay attention to - an agent who won't tell you unpleasant truths, you're hurting only yourself. I tell my buyer clients that there is no such thing as a perfect property, but the same warning is equally important to sellers. There is no such thing as a perfect property, and acting like you own one is a great way to drive buyers and their agents off. You are not doing buyers a favor by putting your property on the market. You have real estate, the most illiquid investment there is, you want the cash those buyers have, and you're not going to get it by giving them reasons why you're too difficult to do business with. If you didn't want what buyers have (cash), you wouldn't have the property on the market. Buyers, their agents, anybody who comes to look at that property is helping you get what you want. I believe that people who look at the property you're trying to sell are doing you a favor. Even if they just want to look at it, in the middle of the best seller's market there has ever been. If the property doesn't show, you won't get offers - guaranteed. If you don't get offers, you are highly unlikely to consummate a successful sale. The property is only worth what someone is willing to offer for it - end of discussion. If the most you can get someone to offer is thirty-nine cents, that's what it's worth. You can choose to sell, or not to sell, for that price, but trying to tell yourself or anyone else that the property is "worth $400,000" when nobody is making offers that high is a waste of energy, and quite likely, of a buyer and an offer that really are offering the best you're likely to get.

Caveat Emptor

Article UPDATED here


As with anything you find on the internet, the critical thing to keep in mind with internet real estate is that it is subject to input control. In plain English, you only see what they want you to see. If they don't want you to see it, it's not going to be put into the internet so that you can see it there. The vast majority of the time, there is no check upon this simple fact of life. If the owner or listing agent don't want you to see something, it's not going to be available to you on the internet. You're going to have to get out and look at the actual property.

What is put onto the internet is a representation. It could be a good accurate representation or it could be an intentionally distorted representation. The online information is never all there is to see. Kind of like a facade - front facade, back facade, and now, internet facade. Online pictures, home for sale websites, virtual tours - they're all subject to any number of tricks that alter how the property is perceived.

You should never put an offer in without having looked at the property in person. I'm very good at what I do as a buyer's agent. Nonetheless, it is most disconcerting on those rare occasions when someone sounds like they might be intending to put an offer in without looking at it themselves in the flesh. To date nobody has done so through me, but I have had to talk a couple people out of it. There is no such thing as a perfect property, and it's very difficult to point out all of the things I believe buyers need to be aware of when they're not there to see me point.

A lot of the most important things are never online. Even if there is a floor plan (rare), it's very difficult for people who are only looking on-line to get a good grasp of internal sightlines. It's also very hard to convey the full sense of the external environment. What can you see? What do you hear? Are there other environmental distractions? Do airplanes fly right over the house on departure when the wind changes? What's the neighborhood like, are there any obviously disturbed neighbors, what are traffic patterns like, how close and how good is freeway access, where is (are) your grocery store(s), and anything else that might be important to you? How accessible is the neighborhood via public transport? Note that some of these questions are double edged swords by definition. Public transport means your friends who don't have a car can get there, as well as making any public transport excursions you may have need far more bearable - but it can also be a conduit for undesirable visitors.

Nor can you really only visit one or two properties. The key to relative value is how the various properties on the market compare to each other, and that includes that whole list in the previous paragraph. No matter how much you make, if you figure you're going to visit an absolute minimum of ten properties before you put in any offers, the probability is pretty much 100 percent you'll end up glad you did.

The internet can profitably be used to narrow your search, by throwing out all of the obviously unsuitable properties. Doesn't have what you need? Asking price way too high? From the pictures, there's no way your family could live there? There's no reason to waste time and gas going to see those properties. You still need to go out and look at not only the properties that are left, but enough properties to give them context. I don't know how often I've heard from people who only wanted to view one property, but in such cases it always seems to be a property I wouldn't buy if the owners paid me to take it off their hands.

The internet can also make it easy to find properties to look at. It certainly beats driving around all the neighborhoods you might like to live in trying to find "For Sale" signs. But it cannot replace physically going to look at properties that might fit the bill. If you're short on time, might I suggest a buyer's agent, or several? That time is their job, the mileage is a business expense, and nothing is so precious as the time people give us to look at property. It's quite likely that a good buyer's agent will narrow your search a lot more, because going out and looking at property gives a lot more information than the internet, and we do it constantly. Getting a good buyer's agent first will make more difference than anything else to how happy you end up (Here's how to find a good buyer's agent)

Property always needs to be evaluated in the context of the area it's in. A lot of what might sell for $500,000 in my area might be less than $100,000 in other locales. This doesn't mean San Diego is overpriced. It means that there's a lot of people who want to live here very badly, these people make comparatively large amounts of money, it's hard to get permission to build, and the prices for the area reflect those factors. If you've decided you want to live in a particular neighborhood you're going to have to pay about the prevailing prices if you want housing. A good buyer's agent can make a big difference, but nobody can find you something that doesn't exist, and in order to really understand what a good bargain is, you've got to go and actually look at some properties that aren't bargains before you understand what a bargain looks like.

Caveat Emptor

Article UPDATED here

The general public may not understand this, but the most critical parts of a listing agent's job all take place before the property hits the market.

The most important responsibility of an agent who wants to successfully list property is one of those. No, it isn't the pricing discussion, although it's closely related and usually done at the same time. It's educating the owner as to what a good offer for their property would be.

The weaker the overall market, the more important this is. In a strong seller's market, if you blow off a good offer, you're likely to get another almost as good. In a buyer's market like most of the country today, telling a good offer to get lost is a great way to lose money. I'm paid on commission. Believe me folks, I'd like to be able to get two million dollars for a not particularly attractive five hundred square foot condo in "the 'Hood" . The fact is that buyers look for the best property at the lowest price. You can try to sell a property for more than it's worth, but it's not going to happen, and trying is the best way I know of to fail to sell at all, or to be forced to sell for a lot less than you could have gotten, and have to pay the carrying costs for the property for a much longer time than if you know a good offer when you see it.

You can't really have the pricing discussion until the owner understands what a good offer would be. The correct asking price is central to a successful transaction. People look at properties based upon asking price, and you are competing with other properties of roughly the same asking price. If you ask too much, your property will be competing out of its league. The people who are looking for something in that price range will have superior alternatives. If the choice is your property or, for the same asking price, a freshly remodeled house with an extra bedroom and bathroom and a lot that's twice as big in a better location, which do you think the average buyer is going to make an offer on? Ladies and Gentlemen, even if your own mother is looking for a property and knows you need to sell, that's going to be a hard sale for your property. On the other side, if you're not asking enough, people will line up to buy, but then you (and your agent) end up with less money in your pocket, and that's not going to make anyone happy except the buyer.

Furthermore, you've got to understand the market you're trying to sell in. In a strong seller's market, you can probably afford blow off offers below a certain threshold. In a strong buyer's market, you need to try and work with anything even vaguely in the right ballpark, to see if you can talk them into something more in line with reality.

Some agents won't do this. They'll either accept whatever the owner wants to ask or even actually inflate the asking price. This is called "buying a listing," because owners who don't know any better get dollar signs in their eyes and sign up with that agent. It isn't really "buying" anything - it's more like a candidate's insincere campaign promises to repeal laws of economics. Anybody old enough to vote should know better than to believe this, but it works, for the same reason Nigerian 419 scamsters are driving around in Ferraris: People want to believe in easy money. In point of fact, as I have written before, this actually sabotages any chance of actually getting the best possible price. Your time of highest interest is right when it hits the market, and the longer the property is on the market, the lower the sales price is likely to be, and when you over-price real estate, you're not only going to end up getting less money in the end, but you'll have to pay carrying costs for the property for a longer period of time. In short, this approach reliably costs sellers money. Large amounts of money. There is no reason but greed and ignorance to do this, but many rotten agents make a very good living conning people who don't know any better. One of the reasons why bargains are hard to find is that the definite majority of the listings out there have been the victim of such an agent. The property isn't going to sell for that price, or anything like that price, but by over-promising on the listing price, they get a signed listing contract, and when all these properties eventually sell for tens of thousands less than they really could have gotten, that agent even looks like a "top producer."

Waiting until the property is on the market is too late. Everybody has already seen that initial asking price. Not to mention the owner still believes the nonsense they've been sold in the above paragraph. Waiting until you have an offer is definitely too late. The agent has been telling them up until this very moment to expect tens of thousands of dollars more, and now the agent is going to try to talk them into accepting what really is a good offer? Not likely to work, and not good for the relationship even if it does. Furthermore, one of the things you learn in this business is that the first offer you get is more likely than not to be the best. Oh, it's not rare or even that uncommon for a better offer to come later, but the most typical pattern is for each subsequent offer to be successively lower. And now you've lost what is likely to be the best offer you're going to get because your agent couldn't explain to you what a good offer was? Run that one by me again: Why are agents supposedly getting paid? I get paid for listings because I really do know how to sell them more quickly and for a higher price than any "for sale by owner". But why in the world would you want to pay someone who doesn't do that, and makes the sale take longer and causes you to have to settle for a lower price? I understand why it happens. I just can't understand why people would want to, other than a combination of ignorance, laziness and greed. Somebody once said, "Too bad ignorance isn't painful." Ignorance is painful, but it's financial pain, and the kind most of those burned by it never realize they felt, because they couldn't recognize the symptoms, and they have no idea how much better they could have done.

For a successful listing that's going to fetch an optimum sale, understanding what a good offer looks like, so the owners know how to react when they get it, and setting the correct asking price so that you do get such an offer, is critical. Failing to do so will put you in that group of people who don't get what they could have for the property, and since you don't understand how and why the problem happened, you're likely to repeat it every time you decide to sell a property. When the market rises rapidly for many years, as the San Diego area among many others did, you can even delude yourself into believing that you were "successful." But when the market returns to something more closely approximating normality, believe me when I tell you you that you'll find out in a hurry that you weren't as successful as you thought.

Caveat Emptor

Article UPDATED here


There's an old literary tradition that cautions the reader to "Be careful what you ask for. You may get it."

Many real estate purchase offers are good illustrations of that principle.

The rule followed by good agents is, "Never make an offer that you wouldn't be pleased to have accepted, exactly like it is." An Offer is a legal term. You're making an offer to fulfill these terms if the seller will. By simply signing the offer in acceptance, the other side can create a binding document with legal force, and at least potentially sue for specific performance. Specific performance is more often used by buyers than sellers, but it is available to both. An offered and accepted purchase contract is roughly equivalent to creating both a "call" for the buyer and a "put" for the seller in options trading. The seller has a right to insist the buyer buy, and the buyer has a right to insist that the seller sell, on these specific terms.

Usually, there are things discovered about the property while in escrow. It just isn't cost effective for prospective buyers to perform an inspection prior to obtaining a contract, and sellers should be mindful of the fact that subsequent discovery can void the purchase contract with an inspection contingency. On the other hand, I can't imagine a buyer insane enough not to build an inspection contingency into the contract. No matter how great a deal they may think they're getting at first, the whole contract is subject to a revaluation if the inspection uncovers major defects. I'd prefer to negotiate repairs or compensation rather than flush the transaction, whether I'm a buyer's agent or listing agent, but if the other side isn't going to be reasonable, sometimes it's necessary to walk. On the other hand, if the sellers have developed remorse and aren't reasonable but the buyer wants to proceed, the buyers can force the sellers to perform by being willing to accept the original contract, as written.

The buyer usually has protection from the various contingencies in the contract - loan, appraisal, inspection, disclosures. But these have a specific limited duration, the sellers (via their agent) can insist the contingencies be removed in a timely fashion, and once they are gone, that buyer is as naked as the seller. Indeed, one of the marks of a good listing agent is being on the ball about contingency removals. Usually, it's the deposit rather than specific performance that the seller goes after because the reason the buyer wants out is it turns out they can't qualify for the necessary loan. Suing for specific performance in such instances is like demanding that men gestate and birth fifty percent of all babies. It's a physical impossibility that isn't going to happen. Sorry ladies, and sellers also. But the deposit money, and any other money in escrow, can be at risk.

Nor is that the limit of the seller's recourse. I'm not a lawyer, so talk to one, but damages certainly seem possible. Many lender owned addenda demand them if certain conditions are met.

The ultimate risk of a poorly written purchase offer, however, is that it leaves the buyer with a property that isn't worth what they paid for it.

It happens, particularly with large deposits. Buyers get into situations where they have a choice of buying or losing that cash deposit they worked so hard for. Even when the latter is clearly the least bad situation, many people, understanding the value of the cash they worked to save rather more clearly than the value of the payments they haven't made yet, will choose to consummate the transaction. They end up with an unmarketable property where they are obligated to make the payments on the loan, property taxes, and insurance. Since most folks are extremely happy to get a 2 percent deposit, this obligates you to 50 times that much by paying attention to immediate cash rather than the overall situation. Plus interest on the loan and property taxes. Ouch. Not a situation you want to be in.

There is a reason for each of the standard contingencies in a sale contract, and you can ask for others in the initial negotiations if you have a specific reason to be concerned. I just closed one where we negotiated an engineering report contingency because I had real concerns about the stability of the property (It was fine. But better my client spends $600 up front than spends half a million dollars for a property that's in danger of falling over). Standard contingencies can also be waived, creating a stronger, more definite offer. I'd be very careful about waiving them, and I always make certain the client understands the implications in writing. There are valid reasons to waive each and every one of the standard contingencies, but it is always a risk, and it can bite. The way I explain it is that it will bite, if you do enough of them - only nobody knows how many "enough" is.

If a buyer is giving up something that the standard contract gives them, there should always be something they're getting in return. If the seller isn't willing to do that, we're obviously making an offer on the wrong property. The same applies the other way around to sellers. One more way agents with good market knowledge serve their clients interests. "Yes, that model match sold for $X last month. But that seller gave the buyer 6% for loan costs, paid all the closing costs, and a twenty percent carryback as well. My client has a twenty percent down payment, doesn't need anything for loan costs, and is offering to pay half of all closing costs. When was the last time you saw all of that?" Every single one of those differences means money in that seller's pocket - money that should mean corresponding money my buyer doesn't have to pay in the form of purchase price.

Purchase price translates into property taxes for the buyer, and can mean exceeding statutory exclusions for the seller (i.e. they end up owing income tax, or at least having to pay an accountant to prove that they don't). The bottom line is that because the seller is getting things of value that the other seller didn't, they should be willing to give up something in the way of purchase price. If they're not, we're talking to the wrong seller and they're talking to the wrong prospective buyer. We want someone who's willing to see reason, he wants that prospective buyer who needs all that extra money from them to make the transaction happen (maybe). I think such a seller is barking mad, but that's their prerogative. It's a free country. They're entitled to lose their potential transaction.

Another thing that a poorly written offer can do is "poison the well." The other side gets so angry about the offer (usually the price part of the offer) that when the prospective buyer comes back with something better, they aren't interested. Happens. Sometimes it's justified, sometimes it isn't. If you're not emotionally attached to the property, no big deal. If it's the one you've got your heart set upon, prepare to make major amends in the form of concessions in order to bring them to the table. Hair shirts and heartfelt apologies are not likely to work. You've set a warning flag in the owner's mind or the listing agent's, and they're going to want something extra to deal with you because they're expecting a repeat of the behavior.

A poorly written offer can also leave you stuck doing something you don't want to, or can't. Suppose you need a contingency for sale of your own property, but neglected to include one in your offer. Bad news. Now you're looking at the transaction falling out, with consequences for the deposit, or renegotiation, and that seller is going to want a goodie of their own for giving you what you need. Renegotiation is also subject to issues from deterioration of mutual trust, as the other side starts wondering precisely how much of the contract you intend to live up to. It should be expected that the inspections are going to raise some negotiation issues, even in "as is" sales. That's life with asymmetrical information - which is basically every real estate transaction. But try to avoid anything else as a reason to renegotiate.

This is by no means an exhaustive list of the dangers. With real estate, the answer to the question "What can go wrong?" is usually, "The mind boggles."* Purchase offers are probably the most noteworthy example of that principle. A poorly written, or poorly considered purchase offer can mean you're stuck with a situation you can't carry through on, and it can cost you anything up to the full purchase price of the property, and perhaps more than that.

Caveat Emptor

Article UPDATED here

*Thanks to Robert Lynn Aspirin and Aahz

This article is for sellers who want to put their property on the market priced too high "just to see if we can get it."

I know where sellers get it. A lot of people are out there hyping the notion that getting a higher price is a function of patience. It isn't. It's a matter of being worth a higher price. The higher priced your property, the lower the percentage of the population that can afford your property and therefore, it takes longer to sell higher end properties. But the notion that getting a better price for your property is a matter of patience is wishful thinking.

I keep telling people, if you want to be a successful seller, think like a buyer (The opposite also applies).

Here's what buyers do: They look for the most attractive property that best suits their individual needs at the lowest possible price.

Buyers are quite conscious of the fact that there are other buyers out there, and they want - very strongly - to harness the collective brain-power of those other buyers. As I had quite forcefully driven home to me recently, one of the things that buyers want out of listing services is "days on market." It wasn't a surprise to me, but the vehemence of the feeling certainly reinforced my understanding. I've written many times about the selling your property quickly and for the best possible price, and the effects of not adhering to that strategy. Buyers don't want to "waste" their time with picked over remains that nobody else liked, hence their rather strong focus on the variable of "time on market". It's incorrect, but that's the way the average buyer sees it. Kind of like the produce and meat sections of the supermarket at closing time. I cannot recall the last time a gateway client sent me an email about a property that had been on the market as much as two weeks - and at least 90% (maybe 99%) of them came onto the market within the last day or two.

So what happens when you put your property on the market over-priced? You might get showings, but when your buyers look at competing properties, they get a better deal - more of what they need and want for the same price - by buying those other properties. Therefore, they will make offers on those other properties - not yours.

Within a short period of time - usually a month or less - the showings will trail off. That pesky "time on market" counter. Buyers aren't interested in what's been picked over and rejected - they want fresh offerings, just like at the supermarket. There are any number of methods of gaming the time "time on market" counter to fool the buyers. Let me ask you: Would all these methods even exist if it wasn't important to buyers? Heck, no! (Enforcement of measures against that gaming is getting stronger, by the way).

Once your property is on the market, it's effectively a depreciating asset, thanks to that "days on market" counter. It may not be as time critical as the fresh seafood counter, but it's a matter of how quickly it loses how much of its value, not whether it does. I'm typing this on May 5 - it you're looking at a fridge full of milk cartons, would you be looking for the one that expires May 7th, May 12th, or May 17th? People are so used to doing this that they don't even realize they're doing it or that it may not be appropriate in this context. But right, wrong, or indifferent, they do this. Pretending otherwise doesn't make it so.

There is one way to refresh that interest in your property, and it's the same way that the grocery store does it. What's the feature of the "day old bread" table that people remember? Sometimes a grocer will have a place for meat or fish that's older than ideal as well, and they use exactly the same principle: lower the price.

At this stage, you've got to lower your price to compete with the other "day old bread," and to get a successful sale at this point, you've got to be priced like day old bread. This means significantly less than you could have gotten in the first place. Nobody buys day old English Muffins for a dollar when there's fresh ones sitting right next to them for that dollar, and it's not like people can't tell they're day old. So in order to sell those day old English Muffins, the store marks them down to fifty cents. The same principle will work to sell a property that's been on the market too long. Even though the discount isn't as steep, proportionally speaking, it's still cost you a large amount of money to put your property on the market overpriced. People still buy day old bread - just not for the same price as the stuff the driver delivered fresh this morning. Not to mention those carrying costs for a property. The fact is, putting your property on the market over-priced costs you thousands to tens of thousands of dollars. The longer it takes you to see the light, the worse it gets.

I've been writing all of this as if asking price was implicitly equivalent to sales price, which is not the case, but the relationship between the two is beyond the scope of this article (or any other article I'm likely to write here). Suffice to say that asking price is a representation by the seller of a sales price they would be pleased to accept.

But the buyer's perception of value diminishes with time on market, regardless of whether or not there is any merit to that viewpoint. In general, there is not, but it's kind of like believing in communism or social security or single payer health care, to construct a "Christmas Carol Ghost" parallel (disaster past, disaster present, and disaster yet to come). Doesn't matter how much nonsense it is - if enough people believe in it, it's going to be the law of the land until enough people change their mind or the whole system falls apart. Since the time between adoption and abolishment is longer than most property owners can hold onto that property, this means you might as well treat it as a fact of life, because from the point of view of a seller, it is.

You can avoid this issue by pricing the property correctly in the first place, and correct pricing should be a difficult discussion if your prospective listing agent is any good. If the pricing discussion isn't difficult, were I in your shoes I'd take that as a strong warning sign and tell that agent that their services are not desired.

Caveat Emptor

Article UPDATED here

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About this Archive

This page is a archive of entries in the Buying and Selling category from May 2008.

Buying and Selling: April 2008 is the previous archive.

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